How to figure out your tax bracket, taxable income and tax rate

Tuesday, June 26th, 2012 BY bryanh

Learn how to figure your tax bracket like the moneychangers. (Photo Credit: Public Domain/National Museum Warsaw/Wikipedia)

Tax time has come and gone in 2012 for most of us, but it’s never a bad time to learn more. This is particularly true if you earn a raise at work during the year, as you may be in a new tax bracket. Here’s some background on the various tax brackets that the IRS certainly knows. You should know it, too.

Tax bracket basics

The tax bracket in which you the taxpayer falls is based upon your taxable income, rather than annual salary. Your bracket is also highly dependent upon your filing status with the IRS, whether it is single, married, married filing jointly or head of household. The percentage attached to your specific tax bracket is called your marginal tax rate, which is not the same as your effective tax rate. The latter is

It is possible to lower one’s tax bracket via contributions to tax-deferred investments like IRAs and 401(k) programs, through charitable donations, or by selling stock at a loss. Stock must be sold at a loss, or it is possible that you will jump to a higher tax bracket. This is true even if your earned income doesn’t increase.

IRS tax bracketology

Bracketology – it’s not just for the NCAA Basketball Tournament. When you’re talking income levels associated with IRS tax rates, tax brackets are where it’s at. Here is the 2012 income level and percentage breakdown, according to IRS Publication 505, Tax Withholding and Estimated Tax –

Single status:

10 percent – under $8,700

15 percent

– between $8,700 and $35,350

25 percent – between $35,350 and $86,650

28 percent – between $86,650 and $178,650

33 percent – between $178,650 and $388,350

35 percent – in excess of $388,350

Married, joint filing status:

10 percent – under $17,400

15 percent – between $17,400 and $70,700

25 percent – between $70,700 and $142,700

28 percent – between $142,700 and $217,450

33 percent – between $217,450 and $388,350

35 percent – in excess of $388,350

The rate you pay

In essence, what you pay in taxes is based upon a combination of tax rates. It isn’t simply your taxable income multiplied by your marginal tax rate. Only a portion of your income is taxed in this way. Your average tax rate is calculated based upon how much your taxable income is taxed at each level. WiseBread gives the example of a taxpayer being single, with a taxable income of $50,000. The tax calculation from Publication 505 is $4,867.50 plus 25 percent, multiplied by the difference between your taxable income ($50,000) and $35,350. The total amount is $8,530.

Take this total tax amount, and divide it by taxable income to calculate the average rate. The tax

Then take the total tax amount and divide by taxable income to calculate the average rate. In this case, the average tax rate is 17.06 percent, or $8,530 divided by $50,000. The decimal is converted into the percentage.